Sec. 172(a) allows taxpayers to deduct against a tax year’s income those net operating losses both carried over to the tax year from previous tax years and carried back from later tax years. An NOL basically is the excess of allowed deductions over gross income. It does not include losses, however, that are disallowed because they cannot be further netted.
For 2008 NOLs, qualified small businesses (those having average annual gross receipts of $15 million or less) have been entitled to carry back NOLs for a three-, four- or five-year period. Generally, however, both businesses and individuals can carry back their NOLs two years and carry them forward up to 20 years. The NOL must be used in the earliest year (except in connection with the 2008 NOL election); any balance that exceeds taxable income then must be used in the succeeding year, until the NOL is used up.
Individuals as well as corporations may incur NOLs. NOLs may not pass from a C corp to its shareholders (or vice versa). However, when a partnership or S corp incurs an NOL, it passes through to the individual partners or shareholders, who may carry back or carry forward the loss. Disregarded entities and sole proprietorships also impart the NOL benefit to their individual owner. Under Sec. 382, a corporation that undergoes a change in ownership and also has NOLs to carry forward from a previous year is limited in the amount it may deduct for them.